CGS International’s (CGS) has raised their FY24-25F EPS by 5-7% on MY E.G. Services Berhad and introduced their FY26F estimates, following a conversation with the management.
In its Company Note today (Apr 8), CGS said they raises their FY24-25F revenue contribution from blockchain but lower transportation revenues given the rapid market share decline for its renewal services as they estimate that MyEG generated c.RM90m in total revenues (12% revenue mix) from its blockchain segment in FY23, with majority anchored by Zetrix token sales.
Going into FY24F, CGS expects this to rise to RM143m, forming 18% of total revenue.
CGS understands that management aims to issue c.1m Zetrix tokens per quarter through the two exchanges that the token is listed on.
Management also guided that Malaysia-China ZTrade (a blockchain-based cross-border customs trade solution) could go live in May 2024, coinciding with the 50th anniversary of Malaysia-China diplomatic relations.
This development is a key milestone that comes ahead of other governments’ efforts, i.e. the Philippines and Indonesia are also looking to onboard the platform.
Additionally, CGS expects the group’s development cost to fall to c.RM150m in FY24F from c.RM460m in each of FY22-23 as the current platform reaches operational readiness, likely leading to FCF improvement and lower gearing level from 22% in FY23 to 10% in FY24F.
Immigration segment should still fare well in FY24F
CGS believes the immigration segment could continue to benefit from vibrant foreign worker hiring activities in FY24F. The Malaysian government has set 31 May 2024 as the deadline for employers to bring in foreign workers in the formal sector, with the aim to reach c.2.5m total registered workers by mid-2024F, from 2.13m as of Feb 2024.
This should expedite further sourcing of foreign workers by employers with hiring quota, which CGS believes will benefit MyEG’s permit renewal and job matching businesses and cushion the ongoing decline in transportation segment revenue due to digitalisation of Road Transport Department services, which has dented MyEG’s legacy renewal services.
Maintain Add; raise TP to RM1.15
CGS maintains their Add call on MyEG with a higher GGM-derived TP of RM1.15 (they lifted their sustainable ROE from 18.2% to 18.8%) due to its attractive valuation (11.8x FY24F P/E, at close to 1 s.d. below its post-General Election 14 average of 16.2x) and potential EPS upside from its blockchain business.
Key downside risks are non-extension of its current concession services, loss of market share in ancillary businesses, and new blockchain solutions failing to materialise.
Potential re-rating catalysts are sustained strong blockchain sales and award of new concession services from both local and foreign governments.
